First-quarter results from China’s top eight banks have revealed that bad loans are steadying and profits are growing although full-year earnings will be hit by higher funding costs.
Total net profits of the eight banks grew 3.0 per cent year-on-year in the 2017 first quarter, according to S&P Global.
The ratings agency said credit metrics stabilised in the first three months of 2017, despite elevated interbank lending rates following tightened regulatory checks on carry trades and wealth management products.
Profitability and asset quality held up thanks to China's stronger-than-expected economic expansion in the first quarter, and the resultant abatement in credit losses. However, net interest margins continue to narrow, particularly for banks that rely more heavily on wholesale funding, according to an analysis of the bank results.
S&P rated Chinese banks including Industrial and Commercial Bank of China (ICBC), China Construction Bank, Agricultural Bank of China, Bank of China, Bank of Communications, China Merchants Bank, Shanghai Pudong Development Bank and China Minsheng Banking.
The banks reported that non-performing loan ratios barely changed - ranging from 1.45 per cent to 1.92 per cent - except for Agricultural Bank which recorded bad loan ratio of 2.33 per cent. Regulatory capital ratios also held up, due to moderate year-to-date balance sheet growth of between 0.6 per cent and 4.2 per cent in the first quarter.
Crackdown on speculative trading
Slower asset growth was particularly evident among mid-sized national banks, including China Merchants, Shanghai Pudong, and China Minsheng due largely to shrinking interbank assets amid a tightening regulatory stance toward interbank carry trades.
“We still expect the banks' earnings to slightly decline for the full year," S&P noted after analysing the bank profit releases.
“While asset quality metrics look adequate in the first quarter, we believe rising funding costs for corporate borrowers, together with reduced support for overcapacity industries as the government's 'supply-side' reforms proceed, will lead to higher credit losses.
"Mark-to-market losses from bond investments will also detract from bank earnings. Credit divergence across the rated Chinese banks will likely continue. In our view, the crackdown on speculative trading in the interbank market and the adoption of macro-prudential assessment to capture risks in banks' off-balance sheet activities will have a more profound impact on some mid-sized banks.
"Banks with stronger deposit franchise including ICBC, China Construction Bank, Agricultural Bank, Bank of China, China Merchants will likely see margins stabilising faster this year, and are better positioned against tightening domestic liquidity and regulatory crackdowns on the interbank market.”
Return-on-Assets ranged from 0.9 per cent to 1.3 per cent annualised.